If you are planning to establish a business in India, choosing the right type of company/business model is really important. There are many types of companies in India. All of them come with their distinct features and benefits.
Let’s discuss the different types of companies in India viz. sole proprietorship, partnership firms, limited liability partnership, one person company, private limited company and public limited company.
What is a company?
Section 2(20) of the Companies Act 2013 defines the term “company” to mean “a company incorporated under the Companies Act 2013 or any previous company law”.
What are the different types of companies in India?
There are various types of companies in India such as:
Partnership Firm
A partnership firm is one of the most popular types of companies/business models in India. To establish a partnership firm, a minimum of two individuals are required to come and form a partnership. In a partnership firm, two or more partners divide the firm’s profits among each other in the ratio agreed upon. The maximum number of partners which is prescribed for a partnership firm is 50 in India.
The partnership business includes any sort of trade, occupation and profession. For governing and regulating partnership firms in India, the Indian Partnership Act was put in place in 1932 and till date this colonial act has been in place with certain amendments.
The partnership form is formed under a contract between the partners known as partnership deed a.k.a partnership agreement. Although partnership deed is not mandatory by law, having it in place helps to avoid legal disputes between the partners in the future. The partnership deed helps to regulate the relationship among the partners and between the partners and the partnership firm.
Benefits of Partnership Firm
Let’s discuss the benefits of a partnership firm.
- Registration is not required in case of a partnership firm, so a lot of money and time are saved on paperwork and registration fees. Therefore, for entrepreneurs with a limited budget, a partnership firm can be an easy and cost effective business model.
- When we compare a partnership firm to a sole proprietorship, the former has more resources for business operations due to the greater number of partners/members.
- Due to the restricted number of partners, a partnership firm has a greater flexibility when it comes to business operations as it is easy for the partners to alter any aims or change the business operations at any point in time with the approval of other partners.
- As a partnership firm belongs to all of the partners, its business operations are well managed by all the partners because these individuals are directly benefited from the profits and are affected by the losses.
- As a partnership firm typically has a partnership deed, the interests of each partner are protected against any fraud that may happen in the future.
Sole Proprietorship
Sole Proprietorship is a common business model/company type in India. A sole proprietorship business is formed and managed by a single individual known as sole proprietor.
This type of company is best suited for individuals who wish to open a business with minimal investment. A sole proprietorship doesn’t require company registration. It can be started from home or on a premise with minimal costs. The business’ control is entirely in the hands of the proprietor/owner who invests in the sole proprietorship.
The sole proprietor is the one to bear all the losses and enjoy all the gains. For conducting the business, he can appoint individuals but the ownership will rest solely with him. Many local businesses in India such as hair salons, parlors and grocery are started as sole proprietorship firms.
Benefits of Sole Proprietorship
Let’s take a look at the benefits of a sole proprietorship firm.
- In terms of making decisions, the complete responsibility lies with the sole proprietor i.e., the owner of the sole proprietorship firm. As a result, the decision making process for the sole proprietorship is faster since there is no need to consult multiple parties for every minor decision.
- Being the business’ sole decision maker, a sole proprietor can keep all the business-related information to himself. The law doesn’t bind a sole proprietor to make the accounts of a sole proprietorship available to the general public.
- The complete ownership of profits which arise from business operations lies with the sole proprietor who is not obligated to share the profits with anyone else.
- Even a minor success of a sole proprietorship can offer greater satisfaction and feeling of pride than other types of business forms since the sole proprietor is responsible for the rewards of their business.
Limited Liability Partnership
Limited Liability Partnership (LLP) is a popular business form in India. Many entrepreneurs start their company as an LLP as it comes with the dual benefits of a partnership firm as well as a company in a single form of organization. LLPs in India are formed and registered under the Limited Liability Partnership Act 2008 or the LLP Act.
Similar to Companies registered under Companies Act 2013, LLPs registered under LLP Act take the form of separate legal entities having a continuous succession. The partners that make up the LLP have limited liability which is to the extent of the contribution made by them.
The cost of forming an LLP is generally lower than that of companies registered under companies act. Compared to companies registered under the companies act, the LLPs registered under LLP act have lower compliances and lesser regulations.
In an LLP, there’s no need to meet the minimum capital contribution and to constitute this type of business, a minimum of two partners are required without an upper limit set. LLP registration is mandatory. An LLP agreement must be formed by partners to govern their rights and obligations.
Benefits of Limited Liability Partnership
A Limited Liability Partnership has the following benefits:
- In case of an LLP, there is no minimum capital requirement and can be formed with the least possible capital easily. In addition to this, the contribution of partners can consist of tangible, movable or immovable or intangible property.
- A minimum of 2 partners is required for an LLP but there is no maximum limit on the number of partners. This gives LLP an advantage over a private limited company wherein the maximum number of members is 200.
- LLP is required to get the tax audit done only in case its contributions exceed Rs. 25 Lakhs or in case the annual turnover of the LLP exceeds Rs. 40 Lakhs.
- In the case of a company registered under the Companies Act 2013, if the owners withdraw profits from the company, additional tax liability in the form of DDT @ 15% (plus surcharge & education cess) is payable. But in case of an LLP, no such tax is payable and its profits can be easily withdrawn by LLP partners.
Public Limited Company
Many entrepreneurs in India start a company as a public limited company. A public limited company can offer its shares to the general public and comes with limited liability. The shares of a company can be acquired by anyone through IPO or via trading in the share market.
Public limited companies are governed by stricter regulatory and reporting standards compared to private companies. The minimum members required to form a public limited company is 7. When it comes to the maximum number of members for starting a public limited company, there’s no maximum limit.
A public limited company’s management team is in charge of running its daily affairs, while its many stockholders hold the actual ownership of the business. Usually, these stockholders are entitled to vote, which includes casting a ballot for the appointment of the board of directors. The executive team in charge of overseeing the company’s continuous business operations is then chosen by the board.
According to the Companies Act, a minimum of 3 directors must be appointed by a public limited company and there’s no upper limit on the number. When it comes to governing the management of the company and strategic decision-making, the board of directors play an essential role. Public limited companies must prepare and issue a prospectus containing detailed information regarding the company’s operational activities and financial condition and providing vital information to potential investors to help them in their decision making process.
Benefits of Public Limited Company
The following are the benefits of a public limited company:
- One of the main benefits of a public limited company is the ease with which the shares can be transferred by the shareholders to other legal persons, whether they are individuals, institutions or organizations abroad.
- Public limited companies are seen as distinct legal entities from their shareholders. In addition to having their own bank accounts, PAN, approvals, licenses, contracts, assets and obligations, public limited companies also have a continuous existence.
- The stockholders of a public limited company have limited liability protection. In case of an unforeseen liability, the stockholders do not have to bear it personally. The liability would only apply to the corporation.
- A public limited company can launch its IPO to raise capital for business growth and expansion or to repay debts.
Private Limited Company
Private limited companies are organizations that limit the liability of their owners. The maximum number of shareholders in a pvt ltd company is 50. Company registration with the Registrar of Companies is a mandatory requirement for private limited companies in India. Among Small and Medium-sized businesses (SMEs), pvt ltd companies are pretty popular due to their limited liability protection and simplicity when it comes to ownership control. Private limited companies can keep their data confidential and have operational independence.
The transfer of shares in a private limited company is restricted to the company’s Articles of Association (AOA). Unlike public limited companies, shares of private limited companies cannot be traded publicly. This is why many private limited companies convert to public limited companies before they can launch their IPOs. A minimum of two directors is required in a pvt ltd and not more than 15 directors are allowed.
Benefits of Private Limited Company
A private limited company has the following benefits in India:
- One of the major advantages of a private limited company is the protection of limited liability amongst all its shareholders. This means that the assets of the shareholders are not at risk in case of any financial or legal liabilities of the company.
- Since a private limited company has its own legal identity, it can own assets in its name, enter into contracts and sue other entities/individuals if required.
- In case of death or departure of any shareholder, the continuity of a private limited company remains unaffected unlike in the case of sole proprietorship.
- Private limited companies are often regarded as more reliable and trustworthy since they generally have a lot of employees, clients and investors (in contrast to other business structures like sole proprietorship and partnership firm).
- Compared to public limited companies, private limited companies are required to comply with fewer regulatory requirements which helps to reduce their administrative costs and burden.
One Person Company
At its core, a one person company is essentially a private limited company which is incorporated with a single owner who is responsible for the management of the company. The single owner is entitled to all the profits of such a company.
As in the case of a private limited company, the limited liability of the OPC’s owner is restricted to his due subscribed capital. Similarly, OPC’s shares are also restricted when it comes to their transfer to the general public or on public platforms like stock exchanges. The shares of an OPC can only be transferred to the nominee under one condition i.e., the departure of the owner.
A One Person Company (OPC) is incorporated and regulated by the provisions of the Companies Act 2013. According to the Act’s Section 2 (62), an OPC is a private company which has only one member. The Act, in section 3, further clarifies that an OPC is to be formed with only one person as its owner.
An OPC is incorporated by the RoC as a Pvt. Ltd. Company. The OPC owner must be an individual who is an Indian citizen and a non-minor who is eligible for owning an OPC in India.
Benefits of One Person Company
Let’s discuss the benefits of a one person company:
- The main benefit of a one person company is having its sole ownership. The sole owner of OPC is entitled to hold all the OPC’s shares and also bring in the entire capital required for the OPC. Being the sole investor, the OPC owner pockets all the profits as his returns on investment.
- The OPC owner has full authority over his company’s decision-making. This streamlines the decision-making process.
- One Person Company comes with limited liability. The OPC owner’s liability towards paying off the losses and debts of the company is restricted to the unpaid amount of capital subscribed to by him. This is opposed to sole proprietorship wherein the owner has unlimited liability.
- OPC, being a legally incorporated company, can be verified thoroughly as its details and documents are available for public inspection on the official website of the Ministry of Corporate Affairs. This makes it easier for the OPC to avail institutional loans.
- An OPC can be continued beyond its sole shareholder’s life if a nominee is chosen for it. The OPC nominee doesn’t necessarily have to be the legal heir of the owner.
Also Read: Comparing OPC and LLP: Choose the Best Option for your Upcoming Startup
Conclusion
There are various kinds of companies/business models in India. Before making up your mind regarding the type of company registration you want, it is important to take into consideration all the pros and cons of each company type.
If you need professional assistance for choosing the right company type/business model for your business, you can connect with Registrationkraft.